Where Investor Money Has Poured In This Year; And Where It's Fled

Hard to find an investor that doesn't agree: President Mauricio Macri is saving Argentina from the Kirchners. Markets love this country again this year. Photographer: Christopher Goodney/Bloomberg

If general consensus is any guide, 2018 is going to be a banner year for portfolio flow and for the general economy here in the U.S. A strong appetite from American investors is also good for global markets. If we assume that what ends the year strong tends to start the year strong, too, then here are the three spots where money has been pouring in this year, according to Cambridge, Mass. fund-tracking firm EPFR Global.

No. 3: Brazil Equity.

The two ways to play are the iShares MSCI Brazil (EWZ) and the MarketVectors Brazil Small Cap (BRF) exchange-traded funds. BRF is clobbering the MSCI Emerging Markets Index, up over 53% this year.

Global money manager, Schroders, is overweight Brazil stocks.

Flows into Brazil Equity Funds climbed to a nine-week high, EPFR Global said. Fund managers, however, remain unconvinced that the super weak government of President Michel Temer will be able to pass even a sliver of the pension reform plan his cabinet ministers led by ex-central banker Henrique Meirelles as FinMin proposed earlier this year.

Flows have picked up, but are still at year-long lows. Most money managers are underweight Brazil due to political risk and a lackluster economic recovery.

No. 2: Global Emerging Market Equities

There are many ways to play this in mutual funds, but the two biggest ETFs are Vanguards FTSE Emerging Markets (VWO) or BlackRock's iShares MSCI Emerging Markets (EEM), which are quite similar in their holdings. Both are heavily weighted towards financials, technology, and consumer goods.

Marc Chaikin, founder of proprietary stock research firm Chaikin Analytics says EEM has a lot of momentum. "This is my favorite of the emerging market funds," he says. "It's got all the right things going for it in our factor-based rating system and I would prefer to be diversified than go full steam ahead into Brazil, even though Brazil has good momentum. I like EEM more."

Flows into EPFR-tracked emerging markets equity funds increased again during the third week of November heading into Thanksgiving. Retail investors committed fresh money for the seventh straight week, their longest streak since a 14-week run ended in mid-first quarter 2013.

Their favorite?

No. 1: Argentina Equity

This is a tough one. Argentina has been shut out of the world's capital markets for so long thanks to Peronist leaders Nestor and Cristina Kirchner that its bonds are no longer a serious weighting in emerging market bond indices and good luck finding an ETF.

The Merval stock index is up 77% this year in pesos. The peso is down 8.64% year-to-date against the dollar. So far this year, Argentina equity funds have led the way in flows as a percentage of assets under management.AUM has nearly doubled due to Argentina's low base. The Dow Jones Argentina Total Stock Market Index is up 40.69% this year.

The bottom three run the gambit from Asia to Europe to Latin America.

Pier Carlo Padoan, Italy's finance minister. The country is still reeling from the 08-09 financial crisis. Photographer: Alessia Pierdomenico/Bloomberg

Italian equity (EWI) and Hong Kong (EWH) have both registered outflows this year, with AUM contracting by nearly 15% for both markets. But the worst of the worst is Mexican equities (EWW), with total AUM contracting by around 20%.

"Everyone has to pay attention to Mexico's NAFTA risk," says Tom Wilson, head of emerging market equities for Schroders. "There will be disruption there. Even more so when you consider Mexico has an election next year, with an anti-NAFTA candidate currently in the lead."

Here at home, inflows into U.S. bond funds are the most robust still, despite concerns about Fed rate hikes next year.

With six weeks left in 2017, U.S. bond funds have been the biggest money magnet domestically, with net inflows over $370 billion as of Nov. 22. By comparison, U.S equity fund flows remain relatively flat in terms of total AUM, meaning AUM remains stagnant from the start of the year.

I've spent 20 years as a reporter for the best in the business, including as a Brazil-based staffer for WSJ. Since 2011, I focus on business and investing in the big emerging markets exclusively for Forbes.